45 Comments

One factor that incentivized pension plans towards private equity was the exceptionally low interest rate environment from the Federal Reserve for the last thirty years, making it almost impossible to fund pension obligations with bonds.

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The Fed is the root cause of most of what has been ailing the US economy for the past 30 years. It has fostered the economic inequality that is eroding our social cohesion.

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A return to 90% maximum tax on the rich would reduce the incentive of company owners to extract all of the profits from their companies. That would mean less institutional money, less endowment funds and less wealthy individuals putting money in these private equity funds.

Regulation Q used to regulate the maximum amount banks could pay on CD's That incentivized savers to put their money with local banks that invested in local businesses. Private equity steals money from local banks and from funding local businesses.

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To me, the biggest issue raised in this excellent piece is the need to reform the bankruptcy laws. If the holders of the leverage-loans that fund private equity had recourse up the holding company chain to make the PE firms responsible for the debt they load on their targets, the industry would disappear.

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Aug 17, 2022·edited Aug 17, 2022

But is the goal is to make the PE industry disappears or to make sure they are properly regulated?

(Also, practically I don't see how this could ever be implemented. The entire financial system is built around clearly defined boundaries of liability)

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Great piece from Adam Levitin here: "The idea that limited liability is a sine qua non of the modern economy is practically Gospel to most business commentators. These commentators assume that without limited liability, no one will ever assume risks, such that any curtailment of limited liability is a death sentence for the private equity industry. They're wrong." https://www.creditslips.org/creditslips/2019/08/private-equity-abuses-limited-liability.html

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What utility does private equity really provide? Genuinely.

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The (theoretical) value that private equity brings is that by buying a company and having more power to set direction for management, they are able to make changes that increase the value of the company. There are many circumstances where a company is held back from fulfilling its full potential because they are public. Sometimes, its poor corporate governance leading to inept executives that are structually hard to get rid of. Other times companies can't execute on changes/plans that will lead to better long term outcomes, because the short term demands placed by shareholders in a publicly traded company won't let them. There is also a side of private equity that acts sort of as a mid-stage venture capital (minus the tech), where by they are able to provide capital for quickly growing companies.

We typically only hear about the about the bad deals and shady stuff that the PE industry has done in the news, and there's a bunch. But if you actually thoroughly and honestly go through all their deals, I think you would find that net net they have added value into the system. There's case studies to be had both on the good side and the bad side of PE. Smarter regulation will help us get rid of the bad side.

("The Money Machine" was a book that was recommended by another reader of this forum.. I think it provides some good examples of how KKR was adding value to society in its early days [and making a ton of money from it].. but how greed and competition led it to shady pastures)

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I would bet every dollar I have that net net, private equity has been a significant drain on the system.

Sure, there's good stories, but I am certain the bad outweighs the good.

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Why?

The basic premise is buy a company.. effect change so they are worth more.. sell company. I'll agree that PE companies can do shady things to affect this change.. but what makes you so sure that net net it is a drain on the system?

Also, even if you are right, and net net it is a drain on the system. Shouldn't we create laws and regulations to get rid of the bad? Or should we just ban buying companies in general?

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No, we should just ban LBOs.

It's a net drain on the system because it financializes the system in a fragile way, so owners can extract from it. There's minimal added value.

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This is precisely what the Stop Wall Street Looting Act (SWSLA) does. It pierces the corporate veil, and puts PE firms (more precisely, the general partners) on the hook for key liabilities. Rather than making the industry disappear, it would reinstate some market mechanism here. GPs could still use leverage, but they'd be responsible for it. So maybe they'd use less debt, more equity. SWSLA isn't a ban on private equity; it's a demand that private equity accept liability, without which you can't have functioning markets.

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I’m reading Peter Goodman’s Davos Man now and it is withering in its criticism of Scharzman, Larry Fink and others

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What a tour de force indictment of the Masters Of The Universe, huh?

After I finished it, I read Zeihan's 'End Of The World Is Just The Beginning'. His anaysis of what's coming in capital markets sounds sensible. He's a bit of a catastrophic, but he's made some pretty solid predictions in the past. Overall, he gives a fairly comprehensive sketch of geopolitics.

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Thanks for the suggestion!

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Jim M.. thanks for the tip... i will read it.

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founding
Aug 17, 2022Liked by Matt Stoller

Excellent summary

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PE treating companies merely as financial assets has given rise to their management as financial assets. IOW, their purpose is to optimize financial returns as opposed to optimizing the financial efficiency in conducting their business mission. They’re incentivized to not invest in redundant supply chains, or IT security, to suppress wages, reduce call center times, and to offshore intellectual capital. The companies don’t invest in innovation, customer service, or creating value for customers in any way. All of those are overhead costs, even when cutting into a company’s muscle.

We’re witnessing the damage done.

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Sarah Bartlett's MONEY MACHINE is a good read on the rise of KKR.

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Thanks for posting.

All I could think about while reading your preface was that the Carried Interest Loophole was recently preserved by centrist-progressive-turned-corporate-stooge Democratic Senator Kyrsten Sinema.

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NOOOO!!! NO! NO! This is not correct..." but mostly had pensions through their corporate or government employer. Pension fund administration used to be straightforward...The country’s deregulatory turn in the 1980s changed all that."

ahhh, this drives me crazy. I hate to self-promote but I've been harping on this for years on my Youtube channel, the idea we all had pensions and everything was just great. It's NOT TRUE.

I recently did a video on this exact thing here. https://youtu.be/iVbzEQP7s5E and another here. https://youtu.be/Mazmw3obflM

In fact in my book You Can RETIRE on Social Security I debunk this stuff too.

Secondly, why did pensions go away? Reagan? Nope... ERISA...in 1974. Why? Because there were many a worker who's companies were being quite loose with the pension money and as such were left out to dry. ERISA was the supposed fix to that.

Guess what? The fix lead to defined contribution plans, (401ks, 403Bs, TSP) instead of pensions.

The 401k is a fundamentally superior to the pension for too many reasons to list here. Namely, you're not tied to your stupid job for 30 years to benefit!

You can leave, take your money with you and start a business, which is exactly what I did and would not have been able to do with a traditional pension.

As far as private equity, they can all kiss my shiny behind. Wealth tax now, as long as the funds are geared to propping up Social Security and medicare. No Ukraine money!

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Josh

I think you are telling one side of the story... you did not mention that companies lobbied Washington to get pensions off their books. They wanted to shift the risk and cost from the company to the employee. ERISA did just that. It reduced how much corporations contributed to employees retirement and shifted risk for managing the assets from the company to the employee.... Americans are now enjoying far less secure retirements because of the decline of pension plans. But hey, share holders have benefitted.

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Americans are enjoying far less secure retirements , eh? Evidence please- let’s see what you got!

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Josh

<<According to the Economic Policy Institute, 48% of seniors are economically vulnerable. And while the poverty rate for those 65 and older remains relatively low, the total number of individuals living in poverty continues to increase — and will do so as that generation ages>

https://msw.usc.edu/mswusc-blog/the-aging-poor-how-social-workers-can-help/

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Josh

We measure income from financial wealth and DC retirement accounts as annuities in order to ensure comparability with DB pensions and Social Security benefits, which are also annuities. Without this adjustment, MINT would overstate the loss in retirement well-being because of the shift from DB pension income to DC assets; one dollar in DB pension wealth produces more measured income than one dollar in DC wealth. This happens because measured DB income includes both a return on accumulated assets and some return of principal, whereas measured financial wealth and retirement account income includes only the return on accumulated assets. We do, however, discount the annuity return by 20 percent to reflect the fact that people cannot necessarily purchase actuarially fair annuities and, if they choose to spend-down their wealth outside of annuities based on life expectancy, they run the risk of depleting their assets if they live longer than expected.

https://www.ssa.gov/policy/docs/ssb/v69n3/v69n3p1.html

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Once again, not evidence of retirees enjoying less secure retirements.

Give me hard evidence that people are less secure today in retirement than they were in years past. You tried with your EPI reference. But that was easy to destroy. Try, try again. Come on, man!

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Josh

You can debate the USC Schools of Social work on the quality of the EPI study.

But if your world view is that you have to start claiming you somehow know more about evaluating data than a world class research University like the University of Southern California then would you not think your argument is on shaky ground?

Where is your evidence REFUTING USC's narrative around the EPI research??

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Josh

<<According to the Economic Policy Institute, 48% of seniors are economically vulnerable. And while the poverty rate for those 65 and older remains relatively low, the total number of individuals living in poverty continues to increase — and will do so as that generation ages>

https://msw.usc.edu/mswusc-blog/the-aging-poor-how-social-workers-can-help/

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First off, are you at all familiar with EPI? Do you have any clue their donors?

Secondly, are you at all aware that transfer payments are NOT included in income?

Thirdly, are you at all aware that the Current Population Survey from the Census bureau UNDERREPORTS income, mainly from seniors. which is why the SSA no longer references it?

I'm assuming no to all the above because if you were you'd see the silliness of relying on the EPI for any fair reporting.

But even then, look at the article you reference, 9.2% of seniors are living in poverty. Poverty in America certainly ain't what it used to be. So if your argument is we need to have pensions because 9.2% people are in poverty you're gonna need something better.

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<<Americans are now enjoying far less secure retirements because of the decline of pension plans>> This is what i said

<<Supporting seniors is an important mission for social workers. According to the Economic Policy Institute, 48% of seniors are economically vulnerableExternal link:>> USC School of Social work.

What i said was validated by the USC School of Social work. I am very familiar with EPI and find their research of good quality. But don't trust my word. You are debating with the USC School of Social Work over the validity of the numbers.

In any case you asked me to back my statement with evidence. USC School of Social work validates the evidence i used. Seems i did my job. No?

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Josh

So to be clear. You are writing books, good for you. But your narrative on pensions vs 401k's is still misleading. According to analysis by the University of Southern California and several other respected experts retired Americans are economically vulnerable. Pensions were an effective way of reducing the economic vulnerability of older Americans just like Social Security pulled tens of millions of older Americans out of poverty.

Americans have faced 40yrs of declining income and wealth. That is a fact and if you are not aware of if you need to read people like Piketty or Krugman or Sitglitz or even conservatives like Zengalis and Thomas Hoenig. It is a simple FACT

401K's were invented by corporations to shift the risk and responsibility for taking care of employees off of the company and on to the employee. And the results are, in the words of USC, far to many "economically vulnerable" Americans.

Reduce growing income inequality and you will reduce the number of older Americans retiring with out enough income. Do you have any solutions for that because clearly just telling people to save more had FAILED, right?

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I'm going to encourage you to read my book "You Can RETIRE on Social Security". https://amzn.to/3KkEGRH

You've obviously fallen for the doom and gloom. It's an easy read. Lots of references. And after that if you wanna stay doom and gloomish, by all means be my guest.

But to sit in America, TODAY, and claim that people are worse off now because a lack of a pension I find funny and sadly I hear this a lot. Thus my book.

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<<And after that if you wanna stay doom and gloomish, by all means be my guest.>> Josh

<<Supporting seniors is an important mission for social workers. According to the Economic Policy Institute, 48% of seniors are economically vulnerableExternal link:>> USC School of Social work.

Do you consider it doom and gloom if you are one of the 48% of seniors that lives in "economic vulnerability"???

Or are you claiming to be better at evaluating EPI data than the experts on such things at University of Southern California School of Social Policy?

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that is not evidence for anything. Do better

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Agree with the comments below about the Fed. 'Lords of Easy Money' probably the best explanation of the problem. If the interest rates are too low and the system is flooded with cheap money, doesn't seem like pension funds have a safe option to get returns.

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I worry about private pension plans. I am happy government has someone trying to made private equity accountable.

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Appreciate this article but had to do a hard stop at this: ...the way a bank uses money in savings accounts to lend to companies." Will read the rest but here you go: https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp

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Banks engage in deposit mobilization. And they engaged in fractional reserve banking. Both those things can be true. In the link you provide, the word "entirely" here does quite a bit of work: "The capacity of bank lending is not entirely restricted by banks’ ability to attract new deposits, but by the central bank’s monetary policy decisions about whether or not to increase reserves."

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Just a general observation (usually but not always true). The more successful an asset management company is at making money for investors.. the more money investors will pour in for it to manage. And the more its incentives deviate from that of the investor.

Beyond just non-transparent fee structures, PE managers also juice up their reported returns.. (at what sounds paradoxically, the investors expense).. there needs to be standardization around return reporting as well.

While investors will welcome the transparency that the SEC proposals will bring, I don't think this will necessarily bring fees meaningfully down. As much as pension funds care about the fees they pay, they care even more about performance. The name brand PE firms and those with great track records will have no problems commanding a premium for their perceived added value.

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Obviously the new changes being considered to rein in private equity are during a democrat controlled administration and Congress. I’m wondering if over the decades leading to where we are now was this situation more the result of less oversight and more permissiveness on the part of republicans or democrats. Or are both sides equally guilty?

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founding

From what I've seen, I think the Republicans are about 60% responsible. They've been the instigators more often than not, but the Democrats have gone along with it, sometimes enthusiastically.

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SB

I agree... Both sides are guilty on this. Biden is the fist to take serious action.

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Matt when I read this article I meant to ask you "what's Gensler's track record?", since it might help to determine how much faith to place in him. Seemed to me he's a no-account do-nothing. But I figured maybe I was just ill-informed. Today I read the latest Doomberg dispatch (https://doomberg.substack.com/p/bed-bath-and-beyond-the-pale) about the recent stock/options market shenanigans surrounding Bed Bath and Beyond. Something any reasonable soul would expect Gensler to address. And the question comes up all over again. What is it that leads you to expect BIG things, or even anything from Gensler?

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The number of publicly traded companies has been cut in half since the early 90's. Corporate debt is at record levels due to Leveraged Buy outs over the past 20yrs... Start ups have been on the decline for 30yrs.

My question is this, what is left for the Private Equity people to buy? Aren't they just swapping assets now by piling more and more debt on these companies?

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